Be Aware and Beware are not the same, of course, but they are both great directives! Employers should not be wary of sponsoring a retirement plan. Value comes in many ways, including enhanced employee benefits, tax efficient savings and improved retirement outcomes for employees.
Sponsoring a plan brings certain important responsibilities. Individuals responsible for the plan are typically serving as fiduciaries. “Fiduciary” is a concept referring to a person managing assets on behalf of others and in a special position of responsibility and trust. A look at its history may illustrate how it impacts our retirement plans.
You and King Hammurabi
Fiduciary principles date back nearly 4,000 years ago to the Code of Hammurabi. This code set out rules for a society led by a Babylonian king of ancient Mesopotamia. Fiduciary principles are also found in the ancient texts of major religions. Modern estate and trust laws originate from the common law in the United States and England dating back over 250 years. Courts would grant relief in situations where an abuse of confidence resulted in personal damage.
For most qualified retirement plans in the United States today, such as a 401(k), profit sharing, defined benefit, or employee stock ownership plan, individuals are charged with administering the plan and making decisions on behalf of participants. These individuals have legally-defined roles and an obligation to carry out those roles according to a standard of care. In general, when you are in a position to make or influence investment, administrative or financial decisions for a qualified plan, it is highly likely you will be considered a fiduciary to the plan.
Duties of Loyalty and Care
The duties of loyalty and care represent the foundation of fiduciary responsibility and underlie all other requirements. The fiduciary standard that sets forth those duties is principles-based and creates an expectation to act in accordance with a set of guiding principles.
The duty of loyalty requires that fiduciaries must not act in their own self-interest at the expense of those they serve. Under ERISA, the supreme retirement plan law in the U.S., the duty of loyalty is incorporated in the Exclusive Purpose Rule, which refers to acting in the sole interest of plan participants.
The duty of care focuses on process. It encompasses numerous obligations including that the fiduciary be competent. Under ERISA’s prudent expert standard, it requires fiduciaries to act with the same level of care, skill, prudence, and diligence that a prudent person who is an expert, and acting in a like capacity and familiar with underlying circumstances, would employ. Engaging a qualified expert is required for a plan steward unable to meet this standard.
At its core, the duty of care requires demonstrable good judgment, knowledge, and diligence when acting on behalf of those being served. Demonstrable means documenting and consistently applying prudent processes.
Why care?
Fiduciary obligations are the highest known to law. Being a fiduciary implies trustworthiness, but it also includes personal liability. A fiduciary can be sued when that trust is violated. Ignorance is NOT defensible in a court of law, neither is turning a blind eye.
Fiduciary excellence does not mean plan stewards are expected to carry all of the responsibilities themselves, but they are expected to manage the process. The expectation is that stewards will engage third party retirement plan experts to help them fulfill their responsibilities.
Something in Common with Parents
What do fiduciaries and parents have in common? No training is required to begin, but help is available along the way! Important responsibilities rest on their shoulders. Just be aware you can increase your fiduciary awareness through educational opportunities and by working with a retirement plan expert.